MACRO VIEW COLUMNS: Record U.S. Home Prices at Risk From Fed Tightening: Macro View

(Bloomberg) — U.S. home prices that rose to a record in June are at risk as the Federal Reserve prepares to trim its balance sheet, part of its efforts to unwind a decade-long campaign to depress interest rates.

The median price for sales of existing U.S. homes recently climbed above $260,000 for the first time ever, according to the National Association of Realtors.

Values have soared as buyers, bolstered by an improving labor market, compete for a lean inventory of homes; Fed efforts to depress borrowing costs have brought the average 30-year fixed mortgage rate down to about 4% from about 6.5% a decade ago

Now, the central bank is about to start trimming its balance sheet, including reducing holdings of the mortgage-backed bonds it bought to provide emergency support to America’s housing market, (see chart)

And it’s on track to raise interest rates, even if the pace is slower than economists expected earlier this year. Yes, the Fed plans to implement these changes gradually, but they’re coming, slowly and surely

Declines in the volume of sales of new and existing homes for July prompted Chris Rupkey, the chief financial economist at Mitsubishi UFJ Financial Group Inc. in New York, to sound the alarm: “If you are trying to sell your current house, forget it, you missed it, no matter how spectacular your property,” he wrote in a report. Home resales had their first back-to-back decline since 2015

There’s still plenty of room for optimism. U.S. home values will rise 5.1 percent in 2017, based on a survey of experts sponsored by Zillow Group Inc. “Housing has got legs,” said Mark Kiesel, chief investment officer of global credit at Pacific Investment Management Co.

Part of the reason fewer housings are being sold is that supply is near an all-time low

There is plenty of demand, and homes are selling quickly. There just aren’t enough dwellings for people to buy

Housing starts remain below levels before the last recession, and builders have focused on higher-end properties out of reach for many people

Yet if it’s tough matching buyers and sellers now with mortgage rates low, just wait until they rise, guided by the Fed. The result will be a headwind for U.S. housing and a headache for homeowners hoping to cash in on this summer’s record prices

NOTE: Wes Goodman is a columnist and markets blogger who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice. For more market commentary, see the MLIV blog To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net Garfield Reynolds

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